Liquidating dividend tax treatment
Liquidating dividends are dividends paid in excess of a company’s accumulated earnings.
They are meant to fully or partially liquidate the company.
The total dividend is: = .00 x 200,000 shares = 0,000 The total dividend will be 0,000.
The company must use its retained earnings balance of 0,000 first and the remainder of the dividend, 0,000 (0,000 - 0,000), will come from the company's paid-up capital.
A company distributes part of the company's profit to shareholders as a regular dividend.
Each blocks of shares acquired must be treated separately and accumulated earnings since the acquisition should be considered only in determining whether a dividend is an ordinary dividend or a liquidating dividend.
Sharon has only received regular dividends before and is not familiar with a liquidating dividend. Regular dividends are distributions of the company's profit that the company pays to its shareholders or owners.
Regular dividends are paid out of a company's retained earnings or the earnings it has accumulated every year since it has been in operation.
Because the dividends are totally paid out of relevant year net income, they are all ordinary dividends and must be recognized as income by Company A.
The journal entry in the first year would be: In the third year and fourth year, dividends declared exceeded the available income.